Adverse selection, a well-known problem in insurance markets, interferes with the provision of fair and efficient coverage for mental health services. Managed care plans have an incentive to attract "good" risks and avoid "bad" risks. The problem for mental health care arises because people likely to use mental health coverage are generally considered "bad risks" with higher overall health care costs than others. Competing managed care plans structure their product in a way to discourage enrollment by persons with mental illness, a practice referred to in the literature as "service-level selection". Despite the significant increase in the diagnosis of mental illnesses among the elderly population, little research has been conducted on the adverse selection against mental health service in the context of Medicare, the largest federal insurance program with more than 40 million enrollees. The objective of this application is to improve on the methods to test for the presence of service level selection, and to investigate how Medicare's new risk-adjusted payment policy affects HMO's selection incentives. The specific aims of this project are: Aim 1: Test for the presence of service-level selection against mental health care in the pattern of choice of Medicare managed care plans. Improve on existing tests of service-level selection in choice models by explicit control for health status variables, by use of HMO expenditures directly, and by following beneficiaries over time. Aim 2: Check the difference in access to care and consumers' satisfaction with plans between individuals with mental health conditions and those with other health conditions, and compare this difference between FFS beneficiaries and HMO enrollees. This aim studies how HMOs effectuate selection against mental health services and the consequence of service-level selection. Aim 3: Simulate the effect of the new risk adjusted payment system (Diagnosis Cost Group (DCG)) on incentives for health plans to engage in service-level selection to anticipate if the changes in the risk adjustment formulas are likely to reduce the incentives to underprovide mental health services.